Tax Type
Corporation Income Tax
Individual Income Tax
Description
Repurchase Agreements and Master Notes
Topic
Allocation and Apportionment
Appropriateness of Audit Methodology
Computation of Income
Date Issued
12-18-1984
- December 18, 1984
Dear ****
This will respond to your several letters submitted pursuant to § 58-1118 of the Code of Virginia in protest of tax on capital not otherwise taxed assessed the above taxable entities for the years 1978 through 1982.
All of the entities (Taxpayers) are related in ownership and all are to some degree a part of an integrated business for the acquisition, development, construction, financing, management and sale of real estate. The protested issues are common to various entities comprising the overall business and will be jointly considered in this determination letter.
Issues and Determination
Issue 1 - Repurchase Agreements and Master Notes
Facts
Certain of the affiliated entities invested funds during the audited years in repurchase agreements and master notes issued by banks. The repurchase agreements were short term obligations of banks secured by governmental obligations and the master notes were unsecured obligations of banks.
It is contended in protest that both repurchase agreements and master notes represent money on deposit, exempt from taxation, or in the alternative, represent accounts receivable contracted in the usual course of taxpayers' business.
Determination
The department has consistently defined money to include checking accounts, savings accounts and certificates of deposit since these are held by the banking institution as deposits and are included in the financial institution's basis for federal depository insurance.
The repurchase agreements in question, however, represent obligations of the financial institution not secured by federal depository insurance, but rather secured by a pool of collateral.
The purchasers of such agreements are not depositors, but investors in securities of the financial institutions. The purchasers of master notes are similarly investors in securities of the financial institutions. A strict interpretation, as required, of the exemption for money provided in § 58-441A(4) does include repurchase agreements or master notes. Furthermore, I am unable to agree that investment in such securities is within the usual course of business of any of the entities involved.
I therefore find no error in the tax assessments regarding these securities.
Issue 2 - Advances to Affiliates
Facts
***** is a contractor in the building construction industry and a developer of commercial real estate ventures on its own account and for the account of others. In furtherance of this business, it has organized a number of limited partnerships, in each of which, Messrs. ***** shareholders of Taxpayer, are designated general partners and developers. Taxpayer advances development funds to its affiliated limited partnerships and is repaid from capital contributions of limited partners when received.
Determination
Since the limited partnerships are organized by Taxpayer as a means of financing and operating its real estate development ventures, the required advances to such partnerships are held to be contracted in the usual course of Taxpayer's business.
Adjustments to effect the determination in this regard are reflected on Exhibit B of this ruling.
Issue 3 - Limited Partnership - Notes Receivable for Limited Partners
Capital Contributions
Facts
Under the terms of limited partnership agreements, Messrs. ***** and ***** are designated general partners and developers for a fee that equals the amount of capital required to be contributed by limited partners. However, limited partners' capital is contributed in installments over periods of from 3 to 6 years and the development fee is payable to general partners upon completion and permanent financing of the project.
For accounting purposes, the total amount of each limited partner's required capital contribution is initially recorded as notes receivable from limited partners and as accounts payable to general partners.
In audit, the department included notes receivable from limited partners in taxable capital as "Other Taxable Property" and excluded the recorded liabilities to general partners as representing obligations contracted for purposes of capital outlay.
Determination
Since partnership capital is deemed to represent ownership of the underlying assets of the partnership and since the liability for development exists only upon performance, notes receivable from limited partners are deemed owned by the contributing partners until paid and will accordingly be eliminated from taxable capital.
The effect of adjustments to the several limited partnerships is reflected on Exhibit E of this ruling.
Issue 4 - Receivables Carried on Books of
Facts
The books of ***** reflect two accounts receivable from affiliates, one in the amount of $**** for each year of audit and one in the amount of $**** for each year of audit. It is contended that each of these accounts had been paid in years prior to audit.
Additionally, the books reflect a note receivable due from an employee in the amount of*** in the years 1979 and 1980. The note was subsequently forgiven and it is contended that it had no value in the years 1979 and 1980.
Determination
Taxable capital will be adjusted to eliminate the accounts paid in prior periods. However, the note from employee will be included in taxable capital until it was written off by the taxpayer.
These adjustments are reflected on Exhibit A of this ruling.
Issue 5 - Note Receivable - Sale of Real Estate
Facts
a general partnership whose purpose is, "to engage in the ownership of property, the buying and selling of Partnership real estate and the construction and operation of an apartment development" held notes receivable during the years of audit for the sale of real estate. In audit, the notes were included in taxable capital in the category of "other taxable property."
Determination
In view of the broad stated purposes of the partnership, taxable capital will be adjusted to recognize the note as a receivable contracted in the usual course of the taxpayer's business.
The adjustment is reflected on Exhibit C of this ruling.
Issue 6 - Notes Receivable on Books of
Facts
The books of ***** reflected a loan to ***** a related entity.
The note was included in audit in the category of "other taxable property."
It is contended in protest that the loan was made in the usual course of the taxpayer's business and should have been included in "the excess of bills and accounts receivable over bills and accounts payable." It is contended, in the alternative, that the note should be excluded in its entirety under the provision of § 58-406 of the Code of Virginia.
Determination
It should be noted that while § 58-406 (Prior to repeal) exempted certain property from the imposition of intangible personal property tax, it specifically excluded from the exemption any such property includible in capital under §§ 58-410 to 58-412 and 58-418 of the Code. I therefore deny your alternative contention for exclusion of the note in issue.
However, in view of the overall purpose of the affiliated group of entities, the integrated operation of the member entities and the services provided for and by the individual members, I will recognize the loan as a receivable contracted in the usual course of business.
The adjustment is reflected on Exhibit D of this ruling.
Summary of Corrected Tax
A summary of the tax liability and penalty of each entity, corrected in accordance with this determination is in Schedule 1 attached. Revised assessments with interest accrued to date will be payable upon receipt.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner